Federal Judge Rules Justice Department Can Sue Standard & Poor's For Fraud In $5 Billion Case Stemming From Ratings

The U.S. government can pursue its $5 billion civil fraud lawsuit against Standard & Poor's following a ruling by a U.S. federal judge in Santa Ana, Calif.

U.S. District Judge David Carter on Tuesday denied S&P's motion to dismiss the lawsuit and said the Department of Justice, or DOJ, had made a sufficient case in "comprehensive detail" to support its civil fraud claims, first filed in February.

The DOJ accuses the credit ratings agency of inflating ratings so that it could win more fees from mortgage issuers and bankers that pay for its ratings. The government alleges that S&P misled investors by not being objective in its ratings from 2004 to 2007.

The complaint is filed under 1989's Financial Institutions Reform, Recovery and Enforcement Act, which allows the government to seek penalties for losses affecting federally insured financial institutions and was instituted after the savings and loan crisis. The DOJ says the largest U.S. credit rating agency failed to downgrade its ratings for collateralized debt obligations, or CDO, even though it knew that they were backed by deteriorating residential mortgage-backed securities, or RMBS. It also says that S&P rated more than $2.8 trillion of RMBS and nearly $1.2 trillion of CDOs from September 2004 to October 2007.

The government has not brought a lawsuit against S&P's main rivals, Moody's Corporation's (NYSE:MCO) Moody's Investors Service and Fimalac SA's Fitch Ratings Inc. Yet 14 U.S. states and the District of Columbia are suing S&P over similar claims in the U.S. District Court in Manhattan.

For its part, S&P, a unit of McGraw Hill Financial Inc., maintains that the suit's claims constitute "puffery" and cannot be a basis for a fraud case.